INCORPORATION OF COMPANIES

INTRODUCTION

The Companies Act provides, by section 14(1) thereof, that two or more persons associated for any lawful purpose may form an incorporated company by subscribing their names to a memorandum and complying with the requirements as to registration.

Section 14(3) of the Act goes on to prohibit the formation of an association or partnership which has for its object the acquisition of gain, unless:

—  it is a professional association or partnership which is declared by the Minister as one not customarily carried on by an association or partnership incorporated under the Act;

—  in the case of any other association or partnership, it consists of not more than twenty members;

—  it is incorporated under the Act; or

—  it is formed in pursuance of some other written law or letters patent.

An association of more than twenty persons and not registered under the Companies Act and not within the exceptions of (a) or (d) of section 14(3) is an illegal association. However that does not prevent the court granting certain reliefs such as an account:

SOH AH SUAN v ANG HUAY CHWEE [1937] MLJ 109.

In this case, The Keppel Bus company was an association of more than twenty bus-owners carrying on business having for its object the acquisition of gain within the meaning of s.4 (2) of the previous companies legislation, The Companies Ordinance (Cap 151). The association was not registered under that Ordinance and was therefore an illegal association. The defendants were the manager and treasurer respectively of the association. A member, on behalf of himself and other members except the defendants, claimed an account of all moneys received by the defendant and other relief.

In granting the order, the court held that notwithstanding that the association was illegal under the Companies Ordinance, the Court was not debarred from affording relief to the plaintiff on behalf himself and all other members except the defendants by granting the account.

Procedural Requirements for Incorporation

Basic procedures:

1. Obtaining approval for the proposed company name

2. Lodging with the Registrar of Companies certain documents:

1. The Memorandum and Articles of Association
2. Statutory declarations by promoters and directors (Form 48A)
3. Particulars of directors and registered office (Form 44, 45 and 49)
4. Declaration of compliance (Form 6)
5. A statement of allotment of shares to the subscribers to the memorandum (Form 24)

3. Payment of registration fees

Memorandum and Articles

By section 16(1) of the Act, persons desiring to incorporate a company are required to lodge the memorandum and articles (if any) of the proposed company with the Registrar together with all other necessary documents. The Registrar is then obliged, upon payment of the requisite fee and being satisfied that the requirements of the Act have been complied with, register the memorandum and articles, if any.

The memorandum (or articles, if any) must also contain the names of at least two persons who are to be the first directors of the proposed company, otherwise, the Registrar is obliged not to register the documents: section 16(7). Likewise, the Registrar is obliged to refuse registration if the proposed company is likely to be used for unlawful purposes or any purposes prejudicial to peace, welfare, security, public order or morality in Malaysia or prejudicial to notional security or public interest: section 16(8).

 Statutory Declarations

The person named in the articles as the first secretary of the company must make and lodge with the Registrar a statutory declaration in the prescribed form stating that all necessary requirements of the Act have been complied with and containing the prescribed information, and the Registrar may accept this declaration as sufficient evidence of compliance: section 16(2).

Every promoter of a proposed company who is a natural person is also required to make and lodge with the Registrar and the Official Receiver, a statutory declaration in the prescribed form that he will not be acting in contravention of sections 125 and 130 of the Act: section 16(3A). Section 125 declares that anyone who, being an undischarged bankrupt, acts as a director of or directly or indirectly takes part in or is concerned in the management of any corporation without leave of court, commits an offence, while section 130 prohibits a person convicted of an offence in connection the promotion, formation or management of a corporation or fraud or dishonesty or offences under sections 132 (duty and liability of officers), 132A (dealings by officers in securities) and 303 (liability for not keeping proper accounts), from acting as aforesaid for a period of five years from the date of conviction or release from prison.

 Name of Proposed Company

Except with the consent of the Minister, a company is not to be registered by a name that, in the opinion of the Registrar, is undesirable or is a name that the Minister has directed the Registrar not to accept for registration: section 22(1) of the Act.

A limited company must have “Berhad” or the abbreviation “Bhd” at the end of its name: section 22(3), while a private company must have the word ”Sendirian” or the abbreviation “Sdn” inserted immediately before the word “Berhad” or before the abbreviation “Bhd” or in the case of an unlimited company, at the end of its name: section 22(4). Section 22(5) goes on to state that it is lawful to use the abbreviation ‘Bhd’ and ‘Sdn’ instead of the words ‘Berhad’ and ‘Sendirian’ respectively.

Under section 22(6) of the Act, the applicant for registration of an intended company must apply to the Registrar in the prescribed form for a search as to the availability of the proposed name and for reservation of the same, if available. If the Registrar is satisfied as to the bona fides of the application and that the proposed name could be used without contravention of section 22(1) (prohibition of ‘undesirable’ names), he will reserve the name for a period of three months from date of lodging of the application: section 22(7). During the period of reservation, no other company may be registered under the reserved name or any other name which, in the opinion of the Registrar, so closely resembles the reserved name: section 22(9).

However, the reservation of a name under section 22 in respect of an intended company does not in itself entitle the intended company to be registered by that name: section 22(10).

ANGKASA JURUTERA PERUNDING SDN BHD v PENDAFTAR SYARIKAT (KETUA PEGAWAI EKSEKUTIF, SURUHANJAYA SYARIKAT MALAYSIA) & ANOR [2004] 5 MLJ 421 (HC).

In this case, the primary issue was whether the trade name ‘Angkasa Consulting Services Sdn Bhd’ was so similar to ‘Angkasa Jurutera Perunding’ that it was undesirable within the meaning of section 22 of the Companies Act 1965.

The court held that these names were in no way identical or closely similar, and read as a whole, clearly denoted two different companies and that the word ‘Angkasa’ was not descriptive of any business and as such, no one ought to have monopoly over the usage of that particular word as a trade name. Even when the plaintiff’s name was translated into the English language the word ‘Service’ in the second defendant’s name was a material distinction from the word ‘Engineers’ in the plaintiff’s name.

MAXIS SDN BHD v SURUHANJAYA SYARIKAT MALAYSIA & ORS [2004] 2 MLJ 84

Maxis Sdn Bhd sought a declaration against the Registrar of the Companies in approving the use of the name of the name ‘Maxis’ by the second to tenth defendants. The second to seventh defendants (the applicants) however counterclaimed against the plaintiff and four others (the respondents) for passing off and applied for an interim injunction to prohibits the respondents from using the name ‘Maxis’, passing off its business as that of the applicants, conducting any form of business using the name ‘Maxis’ or any name consisting of the name ‘Maxis’ and advertising in any form whatsoever using the word ‘Maxis’.

The court held, allowing the application in part and granting the interim injunction as follows:

a.    The original legal concept of passing off was confined to traders competing in the same line of business or goods. However, this cause of action had been extended to protect and preserve the goodwill of businessman. It was not restricted to cases where the parties were engaged in a common field of business activity but also extended to any business that might mislead persons into thinking that those products or services were the goods and services of another

b.    The applicants had through constant and persistent advertisement promoted the word MAXIS to be a name associated and belonging to the applicants in Malaysia. Though the name mainly connected with the business of telecommunications, nevertheless other lines of product and services bearing such name could be considered by the public as that of the applicant.

c.    The actions of the respondents clearly raised suspicions that they were out to deceive, confused and mislead the public into believing that the goods and services they offered were those applicants (MAXIS Group of Companies). When actions were carried out with intention to defraud, as evidenced from the actions of the respondents in the case, the court should be more vigilant and will move in to prevent it; and

d.    From the facts disclosed in the affidavits of the parties, there was a likelihood of damage to the applicants if the respondents were not restrained in this action.

Certificate of Incorporation

Upon registration of the memorandum the Registrar certifies under his hand and seal that the company is incorporated on and from the date specified in the certificate and that company is either a company limited by shares, a company limited by guarantee, a company limited both by shares and guarantee or an unlimited company, as the case may be, and also that it is a private company, if that be the case: section 16(4).

 Conclusiveness of Certificate of Incorporation

Once the certificate of incorporation is issued, it is conclusive evidence that all the requirements of the Act in respect of registration and of matters precedent and incidental thereto have been complied with, and that he company referred to therein is duly incorporated under the Act: section 361.

TAN LAI v MOHAMED BIN MAHMUD & ORS [1982] 1 MLJ 338

In this case, a sawmill licence had been granted to the first defendant and another to operate a sawmill. The licence was not transferable. A company was formed to work the sawmill licence, with a $200,000.00 capital, of which 75% was held by the plaintiff and the remaining 25% by the first defendant and the other licence. Subsequently the plaintiff sold his shares in the company to the first defendant. The plaintiff accepted delayed payment but obtained a guarantee from the other three defendants. The first defendant refused to pay the outstanding balance of $43,000.00. the plaintiff sued the defendants for the amount due. The defendants claimed that the sale of the shares and the guarantee agreement were illegal.

The court entered judgment for the plaintiff, holding that although the agreements were illegal as an attempt at circumventing the condition of non-transferability of the licence, the sale of the shares was not tainted. Further, while the operation of the sawmill by the company was illegal as it had no sawmill licence, the incorporation of the company itself was lawful.

INCORPORATION OF A COMPANY

The term ‘incorporation’ refers to the act of registering a company. Registration is done at CCM, which is the relevant body supervising registered companies and enforcing CA 1965.

When a company is registered, it said to have been incorporated. However, the meaning of incorporation is not limited to the context of company registration. The term ‘incorporation’ has legal implications with regard to the operations of the company and those who are dealing with the company.

A company comes into existence on the date it is incorporated, ie the date it is registered. On that date, it becomes an ‘incorporated association’ because it is an association of persons formed usually for the purposes of doing business.³

On the date of its incorporation, the company will have its own existence and identity that is separate from its members, officers,⁴ employees and those who form the company.

In Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor (1996), the court noted that in the eyes of the law, a company is considered as a legal person, ie it is a persona at law. Therefore, the company is a legal entity by itself. The company will have its own rights and duties.

A company is not a natural person; it only an artificial or juristic person. This is because although it has the powers of a natural person, it does not have the full capacity of a natural person. As declared by Sumner LJ in Gas Lighting Improvement Co Ltd v IRC (1923), a company’s artificial personality is real. Essentially, a company is composed of natural person.

SEPARATE LEGAL PERSONALITY

The separate legal personality of a company means that it has a different legal existence from the shareholders, officers, employees and others who form the company.

This concept does not apply to other forms of businesses such as sole trader or partnership, eg in the context of a sole trader, he and the business are not considered as separate from each other. They are considered as one and the same. Similarly, partners of a partnership firm are not separate from the firm.

The concept of separate legal personality was laid down in Salomon v A Salomon & Co Ltd

SALOMON v A SALOMON & CO LTD  [1897] AC 22

Facts:

Aron Salomon was a sole trader manufacturing boots and shoes. As a sole trader, he was running and managing the business himself. Thus, any profits made belonged to him. His family wanted a share in the business and so he decide to form a company named ‘A Salomon Co Ltd’. Salomon owned 20,001 of the company’s 20,007 shares – his wife, four sons and daughter took up one each of the remaining six shares. He sold the business to the company for £38,782. The company paid Salomon by issuing 20,000 shares at a nominal value of £1 each. The company then issued a debenture for £10,000. The balance of £8,782 was paid in cash. At the time, the governing law was Companies Act 1862, which required a minimum of seven members to form a company. Salomon, his wife, and his five children became the members of the company. He and his two eldest sons became the directors of the company. Some months later the business began to slow down. Salomon lent some money to the company but this did not help improve matters. The company then decided to borrow money from some creditors. The situation still did not improve. Finally, the company had to be wound up. The liabilities of the company exceeded the assets by an amount of £7,733. The issue that arose was whether the creditors should be repaid first or Salomon. The creditors argued that the company and Salomon are considered as one and therefore, he could not bring an action against himself. This would also mean that he should not be repaid. In fact, he should repay the creditors if the company is unable to pay the creditors.

Held:

—  The only requirement under Companies Act 1862 was to have at least seven members in a company, which was satisfied by A Salomon Co Ltd. It does not matter whether one of the members owned a huge number of shares or there is a close relationship among the members.

—  The moment a company is registered, it has an identity of its own, separate from its members and officers. Although after incorporation it seemed as if the same persons were managing and running the business, this is irrelevant in law.

—  Therefore, since Salomon is separate from the company, he is not liable for the debts of the company.

The principle laid down in Salomon has been applied in Malaysia in Abdul Aziz b Atan & 87 Ors v Ladang Rengo Malay Estate Sdn Bhd (1985), illustrating that the principle has been accepted by the courts in Malaysia.

ABDUL AZIZ B ATAN & 87 ORS v LADANG RENGO MALAY ESTATE SDN BHD [1985] 2 MLJ 165

Facts:

All the shareholders of the respondent company by a written agreement sold and transferred their entire shares to a certain buyer in 1981. The main asset of the company consisted of land on which the company appeared to have carried on the business of a rubber and palm oil estate. In November 1982, a claim was initiated for termination benefits under Regulations 8 of the Employment (Termination and Lay-Off Benefits) Regulations 1980. The point in dispute was whether the sale of shares meant that the estate was sold and if so whether a change of employer took place.

Held:

An incorporated company is a legal person separate from the shareholders of the company. The shares belong to the company which does not include the estate. There was no change in the company’s identity or personality. The estate belongs to the company. Thus, the claim failed.

The Salomon principle was also applied in New Zealand in Lee v Lee’s Air Farming Ltd (1961).

LEE v LEE’S AIR FARMING LTD [1961] AC 12

Facts:

Lee formed a company where he held 2999 shares of the company’s 3000 shares. Lee was the only governing director of the company and he hired himself as an employee in the company, ie as the main pilot in the company. His work was to spray fertiliser from the air. One day, the plane he was flying crashed and he died as a result. His wife attempted to claim compensation on behalf of her deceased husband. The compensation board refused because it considered that Lee and the company were one and the same. This was because he formed the company and as a director, he employed himself as an employee. The main question in the case was whether a person could be both a director and major shareholder of a corporation on the one hand, and also an employee of the corporation, on the other.

Held:

The fact that Lee was the governing director does not prevent him from entering into an employment contract with the company. Applying the principle in Salomon, the company and Lee are separate. The contract of employment, which employed Lee, is valid. Lee is an employee. Therefore his wife is entitled to claim the compensation on behalf of the deceased husband.

Consequences of Incorporation

Although the concept of separate legal personality is not expressly provided in CA 1965, it may be implied from s 16(5), which states that the consequences of incorporation are that the company:

—  is capable forthwith of performing all the functions of an incorporated company

—  it has all the functions of an incorporated company

—  it can sue or be sued in its own name

—  it has perpetual succession

—  it shall have a common seal

—  it has power to own land, and

—  it has members’ liability as provided by the Act.

Able to Sue or Be Sued

Since a company has its own existence and identity, a company can sue or be sued in its own name. This rule is laid down in FOSS v HARBOTTLE (1843) 67 ER 189 which states that an action is to be brought in the name of company and not that of the shareholders or directors. In this case, two shareholders in a company brought an action against the company’s directors. They alleged that the property of the company had been misused.  The court held that the injury complained was an injury to the company. In law, the company and its members were not same. Therefore, the members cannot maintain such suit. It was for the company to sue and not the members. In other words, the company is the proper plaintiff to initiate actions in respect of wrongs done to it.

Hence, the company can enforce its own rights and at the same time, incur liabilities. For example, in Salomon, Salomon brought an action against the name of the company knowing very well that the company is named after him, ie A Salomon. Hence, Aron Salomon and the company are separate entities. This then would mean that members, employees and officers of the company can bring an action against the company if they feel that a wrong has been done against them. Similarly, the company can bring an action against its members, employees and officers.

A company cannot sue or be sued as such before incorporation.

AFAD SHA SDN BHD v SPPIK DAGANG SDN BHD & ANOR [1997] 4 MLJ 90

The court held that execution proceedings pursuant to a judgment which was a nullity could not be proceeded with. In this case the nullity arose because the plaintiff had filed the suit before its incorporation under the Act and as the plaintiff was not-existent the court held it had no right to sue.

Perpetual Succession

Perpetual succession is the continuing existence of a company until it is legally wound up or it is struck off by the ROC for non-compliance of CA 1965 or for illegality.

The company is unaffected by the death, bankruptcy, insanity or departure of any member but continues its existence no matter what and how many changes in membership occur.

In RE NOEL TEDMAN HOLDINGS PTY LTD (1967), a husband and wife were the only two directors and also the only two members of the company. They were both killed in an accident. The court held that the company is not affected by the incident and would continue to exist.

Power to Own Land

Rights, liabilities, assets and properties belong to the company and not to the officers, members or the persons who form the company.

MACAURA v NORTHERN ASSURANCE CO LTD & ORS [1925] All ER 51

Facts: Macaura owned a timber business. He insured the business in his own name. Later, he formed a company to buy the business. He was the only shareholder and a substantial creditor of the company. One day, fire destroyed the timber. Macaura attempted to claim compensation.

 Held: The company that he formed is separate from Macaura. He has no insurable interest in the timber. The timber thus belonged to the company and not to Macaura. He cannot claim for compensation. Rights, liabilities, assets and properties belong to the company. Macaura’s relationship is with the company and not the timber.

Limited Liability

In a limited company, the liability of a member is limited. If it is a company limited by shares, the member is only liable to the amount unpaid on the shares: s 214(1)(d), CA 1965. For instance, if the value of one share is RM1 and the person has bought 10 shares, his liability is RM10 since that is the amount unpaid on the shares. Thus, the liability will depend on the number of shares bought and the value of the shares.

Considering the Salomon case, Salomon is only liable to pay for the 20,001 shares whereby the nominal value is £1. With regard to a company limited by guarantee, the member is liable to the amount of undertaking in the M/A: s 214(1)(e), CA 1965. This amount will be clearly stated in the M/A.

A member is not liable for the debts of the company. The debts of the company belong to the company. If the company does not have sufficient funds to pay off its creditors, the creditors cannot bring an action against the members. Again, considering the Salomon case, Salomon is not liable to pay the creditors where the liabilities of the company exceeded the assets by an amount of £7,733. In the event the company is unable to pay, then it will be a case of the company being insolvent.

The directors and officers of the company also are not responsible for its debts –

RE APPLICATION OF YEE YUT EE [1978] 2 MLJ 142

Yee was the secretary of Trans-Market Research Pte Ltd (“the company”). The company was a wholly-owned subsidiary of an American corporation. The company retrenched staff. A dispute arose as to retrenchment benefits. This dispute was referred to the Industrial Arbitration Court. The company was not represented at the hearing although duly served. An award was made in the company’s absence. Shortly after this, the company’s managing director left Singapore. As there was no other resident director, Yee was appointed director to comply with what is now s. 145(2) of the Companies Act. The company did not comply with the award. The Industrial Arbitration Court thereupon made an order that Yee be personally liable to pay the retrenchment benefits.

The High Court quashed the order of the Industrial Court. Choor Singh J held that the order of the Industrial Arbitration Court was clearly erroneous in law. Except in cases of fraud, breach of warranty of authority or other exceptional circumstances, a director is not liable for the debts of an incorporated company.